Day: June 11, 2010

Rewarding Failure

The Kellogg Insights from Kellogg School of Business has an article justifying Bonuses Despite Billion Dollar Bailouts:

Eisfeldt and Rampini’s research suggests that their function is less about the past than the future. Bonuses provide managers with an incentive to be honest about their own performance and about the firm’s prospects earlier rather than later, when shifting capital to more productive managers and more productive uses can have the greatest impact.

Clearly, large bonuses in failing financial institutions is a touchy subject and I would like to stay away from it.  However, there is definitely a case for rewarding failure in R&D.  If all R&D efforts are successful, than the organization is not taking large enough risks and would likely not be able to compete long-term.  Managers need to drive a healthy risk appetite, while managing overall exposure.  Furthermore, if failures are not exposed early, more money is normally wasted in keeping wasteful projects alive.  It also means that the R&D culture is not accepting of failure and that is a dangerous path.

One effective approach to encouraging/managing risk is to tie some fraction of executive compensation to “Wasted Development Effort.”  The idea here is to recognize that some R&D should fail and that the executives should be encouraged to talk about it.  If the term wasted development effort does not sound appropriate, consider Technology Path Elimination.  My boss a few years ago came up with this term and it sounds much better: Encouraging R&D organizations to eliminate technology paths that will eventually lead to failure.  Thoughts?


Key challege for R&D Manages: Manage Complexity

Knowledge@Wharton had an immensely relevant article for R&D management:
Under the Hood of Toyota’s Recall: ‘A Tremendous Expansion of Complexity. The article is a discussion between Prof Fujimoto and Prof McDuffie about the root causes of Toyota’s current troubles.

“MacDuffie: You have studied Toyota and its production system for a long time. Can you tell us what surprised you about the recall crisis, and if there was anything that didn’t surprise you? Fujimoto: I was surprised to see that Toyota was the first to be caught in this trap of what we may call complexity problems. Society and the market are making stricter and stricter demands on all the cars and vehicles in the world. So this could happen to anybody. But I was a bit surprised that this happened to Toyota first, because Toyota executives had [issued] a warning about [being] in a very difficult situation regarding complexity. So they knew that this could happen to anybody.”

I am not sure if many people recognize this rise in complexity.  As the pace of R&D increases around the world and products get ever more advanced, the demands on R&D teams are increasing exponentially.  Instead of improving cross functional communication, the need for specialization is actually fragmenting the R&D and associated management environment.  Cultural and geographical boundaries introduced by multinational multi-organizational teams further exacerbates this fragmentation.

MacDuffie: And that creates tremendous demands on the designers, right?
Fujimoto: Right, it’s a nightmare for the designers. You have to take on all these constraints. It’s like solving gigantic simultaneous equations involving structures and functions. For example, with the Prius recall, the problem resulted because Toyota tried to improve fuel efficiency and safety and quietness at the same time through a nice combination of very powerful regenerating brakes, plus the latest antilock brake system, plus the hydraulic braking system.
But the relationship between the three kinds of brakes changed with the new design, and then drivers could have an uneasy experience when there was switching between the different brakes a little bit…. Toyota failed to see this problem in the right way, at least in the beginning.

The key challenge for R&D managers to come up with approaches to manage this complexity effectively.  Since the trend for faster cheaper and more advanced is not going away anytime soon. What has your experience been?

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